Gold stages recovery to $1,714 following a 5% slump in the price yesterday

Bargain hunters have moved in on gold, sparking a recovery in the price to $1,714.10 following a five per cent plunge yesterday.

The price collapsed from a high of $1790 to a low of $1687 in the
largest one-day loss since December 2008 as investors reacted to the
diminishing likelihood of further stimulus action by the U.S.

Federal Reserve chairman Ben Bernanke appeared to rule out a third round
of quantitative easing (QE3) in testimony to Congress on the state of
the U.S. economy yesterday afternoon.

Shiny: Gold is still up by around 10 per cent this year, putting it on track for a 12th annual gain

Investors had hoped more quantitative easing would push cheap money into the market and boost inflation - against which gold is a traditional hedge - as well as provide additional firepower to buy bullion.

One analyst also suggested a single large seller had driven some of the price decline.

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Bullion is still up by around ten per cent this year, putting it on track for a 12th annual gain, as interest rates remain low and central banks boost liquidity.

Although Mr Bernanke played down the prospects of QE3 in the U.S., the European Central bank offered a second round of cheap loans amounting to €530billion to banks yesterday.

This brings to over €1trillion the amount of money the ECB has injected into the financial system in two months.

Simon Denham of Capital Spreads said the message that QE3 was unlikely in the near term had hit markets, and in particular gold.

'Gold’s rally has been built on the devaluation of the U.S. dollar and since it has shown signs of life in the last few months, gold’s remarkable multi-year rally has been called into question.

'Yesterday’s flood of sellers caused a bit of panic in precious metals markets and quite a few bulls were shaken out of silver too.'

Ross Norman of bullion broker Sharps Pixley said: 'Much has been placed on the testimony by Fed head Bernanke but other markets saw less impact leading to suggestions that it simply provided an excuse for a particular "non U.S." fund to bail and take profits in dramatic fashion.'

And he added: 'Market watchers enviously wishing to get into gold at an attractive level cannot complain that windows of opportunity do not present themselves from time to time.'